Tax Freedom Day (Part 1)

The following is a guest post from my colleague Bob Stoker:

Tax Freedom Day® for 2011 will arrive on April 12th. The Tax Foundation annually calculates total government revenue from many different sources as a proportion of GDP to identify Tax Freedom Day. Since government (at the federal, state, and local level) is expected to collect tax revenues that amount to 27.68% of GDP in 2011, The Tax Foundation asserts that it takes 27.68% of the days in the year to pay the costs of government (101 days, so tax freedom occurs on day 102, April 12th).
The Tax Foundation’s press release emphasizes how many days Americans must work to pay the costs of government: “Americans will work well over three months of the year—from January 1 to April 12—before they have earned enough money to pay this year’s tax obligations at the federal, state and local levels.”
The Center on Budget and Policy Priorities (CBPP) normally celebrates Tax Freedom Day by releasing a critique of the Tax Foundation’s methodology to debunk its claims. The 2010 critique focused on two problems – flaws in the methodology for estimating state level tax freedom days and misleading interpretations of the meaning of tax freedom in the media. Expect more of the same this year.
A common criticism of Tax Freedom Day is that the calculation is misleading because it does not reflect the average or typical tax burden faced by individual Americans. The tax freedom calculation presents the average tax liability weighted by income share, rather than the average tax liability of individual taxpayers.
When weighted by income share, the Tax Freedom Day calculation reflects the income distribution in the U.S. This has important policy implications: It builds in a bias against progressive taxation (such as the income tax) and taxes on unearned income (income from sources other than work) since these taxes fall primarily on high-income people who enjoy a larger share of the total national income. This should give responsible media outlets that report on Tax Freedom Day pause.
This is no small problem. A recent paper by UC Berkeley Economic Professor Emmanuel Saez observes that income inequality (pre-tax income, omitting government transfers) in the U.S. has been increasing for the past 30 years. The top decile of the income distribution in 2006 enjoyed 49.7% of total income, the largest share recorded since 1917. As income is more and more concentrated at the top, Tax Freedom Day will fall later and later in the year – that is, unless we do away with progressive taxation and reduce taxes on unearned income. That is, unless we shift the tax burden on to working Americans.

Part 2 will follow later today. Here is Bob’s earlier post on taxation myths.

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